When bubbles burst: econometric tests based on structural breaks

Jörg Breitung (breitung@statistik.uni-koeln.de) and Robinson Kruse

Statistical Papers, 2013, vol. 54, issue 4, 930 pages

Abstract: Speculative bubbles have played an important role ever since in financial economics. During an ongoing bubble it is relevant for investors and policy-makers to know whether the bubble continues to grow or whether it is already collapsing. Prices are typically well approximated by a random walk in absence of bubbles, while periods of bubbles are characterised by explosive price paths. In this paper we first propose a conventional Chow-type testing procedure for a structural break from an explosive to a random walk regime. It is shown that under the null hypothesis of a mildly explosive process a suitably modified Chow-type statistic possesses a standard normal limiting distribution. Second, a monitoring procedure based on the CUSUM statistic is suggested. It timely indicates such a structural change. Asymptotic results are derived and small-sample properties are studied via Monte Carlo simulations. Finally, two empirical applications illustrate the merits and limitations of our suggested procedures. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Speculative bubbles; Structural breaks; Mildly explosive processes; Monitoring; C12 (Hypothesis Testing); C22 (Time-Series Models); G10 (General Financial Markets) (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (21)

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DOI: 10.1007/s00362-012-0497-3

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